In commercial leasing, insurance matters

Tim Whitney
Tim Whitney

Commercial real estate leasing involves many issues, including one that probably receives the least amount of attention from a tenant negotiating a lease: insurance.

 In most commercial real estate leases, landlords generally want the tenant to indemnify them against everything that could possibly happen in or around their properties. For example, you might see language such as this in the lease:  “… and tenant hereby agrees to indemnify and save landlord harmless from all claims, actions, judgments, suits, losses, fines, penalties, demands, costs and expenses and  liability whatsoever,  including  reasonable  attorneys’  fees, expert fees and court costs on account of (i) any damage or liability occasioned in whole or in part by any use or occupancy of the premises or by any act or omission of tenant, (ii) the use of the premises and common areas and conduct of tenant’s business by tenant, or any other activity, work or thing done by tenant.”

This language usually is followed by a clause with a waiver (of subrogation) that talks about how the tenant and landlord must rely on their own insurance before making a claim against the other’s insurance.

The lease then lists the landlord’s requirements for the minimum amount of insurance he or she expects the tenant to carry – typically not less than $1 million to $2 million for injury or death to persons and not less than $500,000 to $1 million (depending on the value of the property and premises) for property damage. The landlord will expect to be named as additional insured on the policy. The tenant also should have insurance to cover leasehold improvements, trade fixtures, inventory loss or damage, liability, loss of use and possibly even heating, ventilation and air conditioning equipment.

Keep in mind this is a minimum, and the tenant and his or her insurance agent could decide to increase those amounts to a number that’s more appropriate for the tenant’s specific type of business.

The landlord will have insurance as well, but it’s intended to cover up to the full replacement cost of the building and common areas of the property along with public liability coverage. The policy could include such other items as vandalism and sprinkler damage protection. If the landlord is financially strong enough, he or she could choose to be self-insured or might be covered through a policy of blanket insurance because they own many properties. Either way, the tenant is going to participate in the cost of that insurance through payment of the triple net expenses of the property or wrapped into a gross lease.

Everyone always likes to believe nothing terrible could happen, but it sometimes does. The goal for the tenant is to get the right coverage from the right insurance company for his or her own protection and to meet the requirements of the lease. The goal for the landlord is to make sure the property is protected sufficiently against a potential financial catastrophe because of a worst case scenario that could put both the landlord and tenant out of business.

Insurance matters, which is why it’s so important to review a commercial real estate lease with a professional commercial real estate broker, attorney and insurance agent.